The largest expense for most employers are the wages and benefits paid to its employees. As such, there are many ways in which employers can expose themselves to risk. Either intentionally or through a lack of awareness, staff members within the payroll department often times cost their employers large amounts of money.

Effective internal controls can significantly reduce the amount of exposure employers have to these areas. Documentation of these internal controls is critical to ensure they are followed on a consistent basis.

Some simple activities that can greatly reduce intentional fraud include:

  • Separation of duties

  • Rotating job assignments

  • Physical payouts

 

The separation of duties is important even within small payroll departments. No task should be relegated to a single individual. Payroll departments should periodically switch up the responsibilities of the various staff members. This can be very helpful from a cross-training perspective for unplanned absences as well. In addition, having unannounced physical payouts that require all employees to display a photo ID prior to receiving their payroll check can ensure that phantom employees are not being paid within the organization.

Set up internal controls in your payroll department

Staying up-to-date on regulatory and administrative changes is critical to organizations; ensuring they are compliant with ongoing changes that affect payroll processing. Such as:

 

These changes have become highly visible in relation to the Affordable Care Act. Employers should ensure they have a good resource to rely upon for staying abreast of these types of changes and identifying how they might affect their business operations.

Not equipped to handle the ACA requirements on your own? Click here to see how Integrity Data can assist!

 

Ensuring that your processes are effectively documented will greatly improve adoption and ongoing adherence to your company policies.

This documentation should include policies, procedures, system software information, job descriptions and employee master file descriptions. The documentation can be referenced by new additions to your payroll staff as well as by existing employees that are filling in for absent employees and when rotating job assignments.

If you haven’t implemented and documented your internal controls, I would recommend you take the time to write and maintain your documentation. It is time consuming, but the benefits you would receive from these internal controls can greatly outweigh the work effort required to implement them.

Mitigating exposure to IRS penalties and employee fraudulent activities should be a top of mind issue for payroll managers.

Internal controls are the best, first-line-of-defense against these costly issues.

 

Resources

There are several resources to help payroll managers to “stay in the know” in these critical areas:

  • The American Payroll Association (APA) and the Society for Human Resource Management (SHRM) have a great collection of information that can be beneficial to employers. Regional meetings and conferences provided by these organizations can be helpful as well.
  • For employers that use Microsoft Dynamics® GP Payroll and Human Resource functionality, check out our Payroll User Group.
  • Stay updated by following our blogs and tweets!

 

Tom Franz, Integrity Data

Written by Tom Franz, CPP
Director of Client Services at Integrity Data, Inc.
Follow @TomFranzCPP on Twitter

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